The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

by Charles Goodhart

While there is continuous discussion about the potentially changing levels of the equilibrating (neutral) level of the real interest rate (r*) and of the underlying, sustainable, rate of growth (g*), the common assumption is that the NRU (u*) is fixed and constant. But the evidence is contrary. u* appears to have been more variable over time than either r* or g*. Apart from the Asian countries (China and Japan), the sustainable rate of growth in advanced economies has seemed to vary in recent decades between about 3.5 and 1.5% per annum, and the equilibrating real interest rate between 2 and 0% per annum. In contrast, u* has varied between about 5 and 2%. After the unhappy experience of the 1930s, economists such as Beveridge and Keynes initially thought that achieving a level of 4–5% would be a good outcome. But the success of full employment policies bringing UE down to around 1.5% after World War II, initially with relatively little inflation, led to the aim of holding UE below 2%.4 Demand management, and full employment policies, greatly strengthened the bargaining power of workers and trade unions. The alternative to not agreeing to the employer’s wage offer would be another job elsewhere, rather than unemployment. Also, as noted in Chapters 3 and 5, demography led to an improving dependency ratio. Union membership generally rose until about 1980